What is a Restrictive Covenant and how to use it effectively.

As a small business owner you probably expect to part company with former employees on good terms, but sometimes this doesn’t happen, and you have a business to protect against unfair competition.

We’ve all heard horror stories of the star sales employee who left their employer only to take the lion’s share of clients with them, leaving the business in dire straits.

This is where putting clauses in an employee’s contract of employment, when you first employ them, restricting their ability to compete with your business in your locality, or to poach your customers or employees after they have left, can help.

These are called restrictive covenants and often act as an effective deterrent to stop ex-employees taking unfair advantage when they leave.

What is fair use of a restrictive covenant?

It’s important to ensure that the restrictions are reasonable in scope and length, as it would be unreasonable to stop an ex-employee from earning a living completely, and you cannot try to use these sorts of clauses to stamp out all competition.

In the UK, there is a legal presumption that any attempt to restrain trade is unenforceable, unless done to protect lawful interests. And, like much of law, this is a grey area, without hard and fast rules, so we have to look at previous court cases for specific industry sectors and specific job roles to determine what is fair. And that is a good reason to get professional help with your employment contracts.

The general principle, however, is to consider what minimum restrictions might be imposed on your employees in order to protect your valid business interests, whilst not unduly restricting the employee when they leave your business.

Types of restrictive covenant explained

1. Competition in the same area of business

If there is a risk that an ex-employee could set up their own operation in direct competition to you, using skills and know-how gained whilst working with you, then you can try to protect against this. This would be called a ‘non-compete’ clause in their employment contract usually for a specific period of time and in a particular geographical area.

2. Using company information

Standard employment contracts will usually contain sections on Confidential Information and Intellectual Property, which seek to prevent employees, whilst working for you and afterwards, from using any information or material they received or created whilst working for you.

3. Poaching customers or suppliers

If there is a risk that an ex-employee will have strong relationships with any of your key customers or suppliers, then you can try to protect against them poaching these customers or suppliers by including a ‘non-solicitation’ clause in your employment contract.

4. Poaching employees

If there is a risk that an ex-employee could entice some of your other current employees away to work for them, taking their knowledge and skills with them, then you can try to protect against this using a similar ‘non-solicitation’ clause.

It’s important to remember that restrictive covenants will not be applicable for all staff, and it would be unfair to include a blanket ban across all your employees. Additionally, they are less likely to be enforceable if you put the same restrictions into all your staff members’ contracts. Look at categories of staff, assess how high the risk is to your business of them taking an unfair advantage from their time with you, and concentrate on those employees where the risk is highest.

If you try to go for too much protection, none of the covenant will be enforceable, so it is always worth erring on the side of caution. And restrictive covenants need to be kept under regular review and may well need changing if an employee is promoted or changes jobs.

For help on how to create the right Restrictive Covenants, or any help with employment contracts, feel free to get in touch with one of our qualified consultants here at citrusHR or call us on 0333 444 0165.